Nanofilm Technologies International Limited

 Nanofilm Technologies International Limited (“Nanofilm” or the “Company”)  is offering 77,236,200 shares for its IPO on SGX. The Company is a leading provider of nanotechnology solutions in Asia. 3,861,900 shares will be available for public subscription and the remaining will be placed out. The offering price is $2.59 per share and the market cap is $1.7 billion.

 The IPO will closed on 28 Oct 20 at 12pm and start trading on 30 Oct 9am.

 Key Business Units

 The 3 key business units are as follows:

 

Financial Highlights

 

The Company is showing very strong growth with revenue growing at a CAGR of 17% and Adjusted EBITDA at 15%. The EBIDTA margin is pretty impressive at close to 40%.

I am not sure if you have heard about the Rule of 40 in the software space. You can read more about the Rule of 40 here. Using the figures from page 44 of the prospectus, revenue growth for FY2019 is 16.3% and the net profit margin is 21.4%. The sum of which is 37.7%, which is pretty close to 40%. For Nanofilm to have a growth rate that is close to 40 is pretty impressive.

While this is a not a software company, it is in the technology space and the revenue is pretty sticky as the nanofilm technology needs to be planned way ahead. Once the technology is applied to the parts, as long as the end products are in production, the revenue will be very “sticky”. According to page 22 of the prospectus, the likelihood of its key customers switching to alternative solutions provider is relatively low as it benefits from high barriers to entry. The customers’ stickiness is evidenced by Nanofilm being the single source supplier, across a number of mission critical applications, to 9 out of 10 major customers.

 The length of relationships with its key customers are below:

Looking at the credit quality of the customers, there shouldn’t be a lot of “bad debts” issues arising from the revenue.

Key Competitive Strengths (per the prospectus) 

• Nanofilm believes that its vacuum coating technologies and advanced materials are superior to conventional coating technologies that allow it to solve complex problems for its customers. Its TAC-ON advanced material is among the hardest materials in the world that includes diamond and graphene. This helps prolong durability and lifespan of their customers’ products, as well as enhanced the aesthetics of their customers’ end products. The picture below illustrates some of the uses for its technology and you can find more illustration on page 20 of the prosectus

• Nanofilm’s patented FVCA technology also enables vacuum coating deposition to be performed at room temperature, which is not only environmentally friendlier, but also enables the vacuum coating to be performed on a wider variety of materials on a commercial scale. The ability of FCVA technology to be applied on low melting point materials are creating new opportunities for the Company in areas such as personal grooming, new energy, 5G, biomedical and aerospace industries. The diagram below show how the technology can be applied to new areas. Page 24 of the prospectus talks about the JV with CYPR, China’s largest piston ring maker for the automotive industry, where revenue growth has been significant

Management pay and Shareholdings

It is interesting to note that the Founder Dr. Shi Xu is not the highest paid after the IPO and will get between $500k to $750k. However, Dr. Shi’s wife is an employee, holds the AVP title, takes care of corporate affairs and project manager for production, is paid between $0.45m to $0.5m. Together, the couple will own 54.5% of the Company post IPO.

 The two highest paid executives are Mr. Lee Liang Huang, who will get a bumper pay rise to between $1.25m-$1.5m and Mr. Gary Ho who will be paid between $1m to $1.25m due to the share options.

Heliconia will own 8% of the Company, the Cornerstone investors at 15.8% and new investors at 11.7%

Valuation

 

Based on the EPS of 5.57 cents, Nanofilm is being listed at a historical PER of 43x.  EPS has been growing strongly over this period. 

If you look at the 1H20 versus 1H19, it seemed that the EPS increased quite a bit in 2H19.  On the conservative side, EPS for FY2020 should be 1H20 x 2 = 3.05 x 2 = 6.1 cents. That will translate into a PER of 39x

On the more aggressive side, revenue grew from $55.2m for the 6m2019 to $77.8 for the 6m2020. It doesn’t seemed to be materially impacted by Covid. Assuming the same growth rate of 40% over prior year, revenue will grow to $198m. If we apply the same 40% growth rate to its EPS, the EPS for FY2020 will be around 5.57c x 1.4 = 7.8 cents. That will translate into a forward PER of 30x.

The analysis above are just my wild guesses as I am not privy to any projections but it seemed like the institutional investors are better positioned to make a call on this.

What I like about the Company 

• Highly experienced founder and management team – from a small NTU incubation start up in 1999, to where it is today, Nanofilm has gone a long way. This is one of the home grown success story led by Dr. Shi Xu and he has assembled a group of local talents (all the other C-suites are Singaporean sounding except for the CTO and the founder himself. Lol). The Company has grown very rapidly over the last few years. The lead independent director, James Rowan, has the necessary experience and expertise as he was previously the CEO of Dyson 

• High growth and profitable tech company – The Company has been growing at a CAGR of 17% from 2017-2019 and the first half results for 2020 showed no signs of slowing down. This coupled with a strong EBITDA margin and highly sticky revenue means that the Company will be able to expand into new areas with the existing cash flows. The new factory Shanghai Plant 2 will commence in Q1 2021 and that will increase its production capacity to meet anticipated increase in demand from 5G smartphones and wearables 

• Strong institutional cornerstone investors  - Separate from the offering, the IPO attracted strong cornerstone investors such as Aberdeen, AIA, Avanda, Eastspring, EPF (from Malaysia), Fullerton, Lion Global, Nikko Asset Management that will subscribe to new cornerstone shares as well as acquiring shares from Dr. Shi Xu. Some of you may be concerned that Dr. Shi Xu is cashing out but I am not too worried. In fact, he still holds a substantial stake in the Company and this sale will reward him for his many years of hard work but he remains vested in the success of this Company. A note to readers that the Company is invested by Heliconia prior to its IPO through convertible notes. It is worthy to note that Heliconia is a wholly-owned unit of Temasek that is independently managed (i.e. not controlled by Temasek). Having said that, Temasek is invested directly through its SPV – Venezio Investments. Do note that most of the cornerstone investors are not subject to any lock-up 

• Highly cashflow generative – if you look at the cashflow statement on page 47, the Company generated $52m from its operating activities last year but reinvested much of the cash in its business.

 

Some of my concerns 

• Non-dividend paying for a while - The Company paid out some dividends ahead of its IPO and promised to pay at least 20% of its net profit after tax only for the year ending 31 Dec 2021. For those “dividend investors”, this is a quite long wait as the eventual payout will likely be around Q2 2022. I guess this is to reward investors who “stayed with the Company” for at least a year 

• High IPO valuation – While this is a high growth company, it is also listing at a high valuation with a lot of promises being priced in. Given that the IPO market has revived globally, I am sure this Company could have sought listing elsewhere but decided to list here due to its roots and probably to avert any perception that it is a Chinese company. Listing in Singapore probably allows it to claim “neutrality” despite having factories in China. The rule of 40 (given the stickiness of the revenue and potential growth) helped addressed some concerns but there is no doubt that this company is richly priced 

• Dependent on a single or top 5 customers – Nanofilm is highly dependent on one customers that accounted for half of its revenue. The top 5 customers accounted for 65% to 82% of the revenue historically. While some may view this a major risk, it is actually quite efficient for Nanofilm to dedicate resources to make the top 5 customers happy. This will ensure that its products are entrenched in all future product development and pipeline. It is not a major concern for me but I raised it given the significance 

• Not a big 4 auditors – With no disrespect to Moore Stephens, the auditors of Nanofilm is not from the big 4. After Wirecard, frankly, who cares. Lol. 

• The Company may not be moving fast enough and the technology may become outdated – If the founder of Amazon said his company might fail one day, you will have to sit up and listen. The 4 concerns I raised above is actually “nothing”. My biggest concern is that the Company is not moving fast enough to conquer the new markets and its nano technology being “replaced” by another start-up if it gets complacent. That to me, is the biggest risk of this investment

 Chilli Ratings

This is the “blockbuster” IPO of SGX for 2020 and for the first time, it is not a REIT ! I like this Company for the many reasons I listed above and the potential new areas they can develop into. However, if you don’t use your imagination, you will find that the Company is richly valued and the saving grace is the quality of the Cornerstone investors as well as the hot demand of 19x. Do they know something that we don’t? It is very rare for Temasek to participate in a local IPO directly and to be named in the prospectus. Hope there is no national service here. Lol.

With the strong institutional backing, Nanofilm has scripted itself into the biggest IPO for 2020 in Singapore and we should all perhaps rejoice that it has decided to list in Singapore instead of elsewhere.

Let’s do our part in this historical moment and notwithstanding the rich valuation, I will give it a 3 stars rating. 

(You should be able to flip this safely but I struggled for a long time whether to give it a 2 chilli rating because of its rich valuation)

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